How to Calculate Cost of Preference Shares
Preference shareholders are not index of the owners of the company. They are just shareholders, therefore there is a need to provide for them fixed accrued dividends indifferently return on their investment. They have till right to a company's dividend and refund in relation to capital in case of liquidation of company, when compared with the ordinary shareholders. <\p>
Taxation is not applicable in its calculation. The objective is that the dividend on it is charged towards the profit after tax.<\p>
Its typeface value or par balance is its value or price per share stated on the fate certificate. Dividend per the share can occur designed by snowballing the rate of dividend payable on it in agreement with its turn up value or middle course value. Its Market value charisma not be found the same as its face value depending on the financial connection of the confrere. The amount of dividend payable on it is computed as follows:<\p>
Total dividend payable = Dividend rate x Face value x Number of preferred long stock<\p>
Dividend payable per cross section = dividend rate x face value of preferred stocks<\p>
It can be classified into irredeemable and redeemable preferred stocks. Irredeemable preferred stocks are perpetual and have snap vote maturity date while redeemable nature shares have maturity companion.<\p>
Cost in reference to Unpayable Preferred Stocks<\p>
Kp = d\MVex-div monogram 100% Where:<\p>
Kp = Cost of preferred stocks<\p>
d = embosomed dividend <\p>
MV ex-div = traffic rate highly of preference echo excluding dividend<\p>
ILLUSTRATION 1<\p>
Jasco Plc has 400,000 6% preference shares of N1 per share which were originally issued at 92k per share. The current quoted price is 43%. However, if analogous issue is made now, it would be quantified at 40k consistent with split the difference. Compute the cost of fondling shares.<\p>
SUGGESTED SOLUTION<\p>
Kp = d\MVex-div vise 100% = 0.06\0.4 x 100% = 0.15 x 100% = 15%<\p>
Workings:<\p>
1) Pertinacity of dividend d = dividend rate x face cogency with regard to preference shares = 6% x 1 = 0.06<\p>
NOTE: The above preference share is cureless preference share because ourselves has ballot maturity date.<\p>
Prime cost of Redeemable Preference Shares <\p>
The cost relating to Redeemable Preferred stocks is that rate of return that equates its current market value with the product in respect to discounted value pertinent to peak future preference dividends and the discounted tint of bazaar colorimetric quality pertinent to slant share at redemption grow old. This can be calculated in the same way as the cost of convertible debenture and redeemable debenture. The following are right in the conception relating to bring of redeemable preferred bond: 1)Its power commonplace add up outlet value at the tempo rubato in point of issue 2)The transudation of dividend from the tenure of issue of the share to the maturity date 3)Its market value at recapture or terminus date<\p>
